SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
-----------------------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-1405
Delmarva Power & Light Company
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware and Virginia 51-0084283
- --------------------------- -------------------
(States of incorporation) (I.R.S. Employer
Identification No.)
800 King Street, P.O. Box 231, Wilmington, Delaware 19899
- --------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 302-429-3089
------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at April 30, 1996
- ----------------------------- -----------------------------
Common Stock, $2.25 par value 60,754,568 Shares
DELMARVA POWER & LIGHT COMPANY
------------------------------
Table of Contents
-----------------
Page No.
--------
Part I. Financial Information:
Consolidated Balance Sheets as of March 31, 1996
and December 31, 1995................................. 2-3
Consolidated Statements of Income for the three
months ended March 31, 1996 and 1995.................. 4
Consolidated Statements of Cash Flows for the
three months ended March 31, 1996 and 1995............ 5
Notes to Consolidated Financial Statements............ 6-10
Selected Financial and Operating Data................. 11
Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 12-16
Part II. Other Information and Signature.......................... 17-22
-1-
PART I. FINANCIAL INFORMATION
DELMARVA POWER & LIGHT COMPANY
------------------------------
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
-----------
March 31, December 31,
1996 1995
ASSETS ---------- ----------
------
UTILITY PLANT, AT ORIGINAL COST:
Electric........................................... $2,973,888 $2,942,969
Gas................................................ 212,292 208,245
Common............................................. 128,226 130,949
---------- ----------
3,314,406 3,282,163
Less: Accumulated depreciation.................... 1,213,282 1,189,269
---------- ----------
Net utility plant in service....................... 2,101,124 2,092,894
Construction work-in-progress...................... 96,208 105,588
Leased nuclear fuel, at amortized cost............. 31,280 31,661
---------- ----------
2,228,612 2,230,143
---------- ----------
INVESTMENTS AND NONUTILITY PROPERTY:
Investment in leveraged leases..................... 48,214 48,367
Funds held by trustee.............................. 33,285 36,275
Other investments and nonutility property, net..... 54,402 54,781
---------- ----------
135,901 139,423
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents.......................... 41,307 28,951
Accounts receivable:
Customers...................................... 119,415 116,606
Other.......................................... 17,747 14,630
Deferred energy costs.............................. 10,277 --
Inventories, at average cost:
Fuel (coal, oil, and gas)...................... 22,646 30,076
Materials and supplies......................... 36,492 36,823
Prepayments........................................ 7,713 12,969
Deferred income taxes, net......................... -- 5,400
---------- ----------
255,597 245,455
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS:
Prepaid pension cost............................... 19,549 16,899
Unamortized debt expense........................... 12,072 12,256
Deferred debt refinancing costs.................... 23,321 23,972
Deferred recoverable income taxes.................. 147,828 151,250
Other.............................................. 52,452 47,287
---------- ----------
255,222 251,664
---------- ----------
TOTAL ASSETS $2,875,332 $2,866,685
========== ==========
See accompanying Notes to Consolidated Financial Statements.
- 2 -
DELMARVA POWER & LIGHT COMPANY
------------------------------
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
-----------
March 31, December 31,
1996 1995
CAPITALIZATION AND LIABILITIES ---------- ----------
------------------------------
CAPITALIZATION:
Common stock....................................... $136,717 $136,713
Additional paid-in capital......................... 506,138 506,298
Retained earnings.................................. 291,244 281,862
Unearned compensation.............................. (2,255) (1,433)
---------- ----------
Total common stockholders' equity.............. 931,844 923,440
Preferred stock.................................... 168,085 168,085
Long-term debt..................................... 853,585 853,904
---------- ----------
1,953,514 1,945,429
---------- ----------
CURRENT LIABILITIES:
Short-term debt.................................... 52,615 63,154
Long-term debt due within one year................. 1,507 1,485
Variable rate demand bonds......................... 86,500 86,500
Accounts payable................................... 67,751 64,056
Taxes accrued...................................... 15,000 4,802
Interest accrued................................... 21,057 16,355
Dividends declared................................. 23,368 23,426
Current capital lease obligation................... 12,590 12,604
Deferred energy costs.............................. -- 222
Deferred income taxes, net......................... 958 --
Other.............................................. 25,633 33,595
---------- ----------
306,979 306,199
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes, net......................... 518,350 519,597
Deferred investment tax credits.................... 44,421 45,061
Long-term capital lease obligation................. 20,330 20,768
Other.............................................. 31,738 29,631
---------- ----------
614,839 615,057
---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES $2,875,332 $2,866,685
========== ==========
See accompanying Notes to Consolidated Financial Statements.
- 3 -
DELMARVA POWER & LIGHT COMPANY
------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
-----------
Three Months Ended
March 31
----------------------
1996 1995
--------- ---------
OPERATING REVENUES
Electric................................................. $246,939 $215,409
Gas...................................................... 45,691 42,191
--------- ---------
292,630 257,600
--------- ---------
OPERATING EXPENSES
Electric fuel and purchased power........................ 81,719 73,881
Gas purchased............................................ 23,743 23,087
Operation and maintenance................................ 73,170 53,638
Depreciation............................................. 29,633 26,883
Taxes other than income taxes............................ 11,089 10,067
Income taxes............................................. 22,716 21,792
--------- ---------
242,070 209,348
--------- ---------
OPERATING INCOME.......................................... 50,560 48,252
--------- ---------
OTHER INCOME
Nonutility Subsidiaries
Revenues and gains...................................... 13,307 12,147
Expenses including interest and income taxes............ (11,254) (10,248)
--------- ---------
Net earnings of nonutility subsidiaries............. 2,053 1,899
Allowance for equity funds used during construction...... 225 184
Other income, net of income taxes........................ (82) 386
--------- ---------
2,196 2,469
--------- ---------
INCOME BEFORE UTILITY INTEREST CHARGES.................... 52,756 50,721
--------- ---------
UTILITY INTEREST CHARGES
Interest expense......................................... 18,219 15,854
Allowance for borrowed funds used during construction.... (606) (541)
--------- ---------
17,613 15,313
--------- ---------
NET INCOME................................................ 35,143 35,408
DIVIDENDS ON PREFERRED STOCK.............................. 2,440 2,519
--------- ---------
EARNINGS APPLICABLE TO COMMON STOCK....................... $32,703 $32,889
========= =========
COMMON STOCK
Average shares outstanding (000)......................... 60,759 59,738
Earnings per average share............................... $0.54 $0.55
Dividends declared per share............................. $0.38 1/2 $0.38 1/2
See accompanying Notes to Consolidated Financial Statements.
- 4 -
DELMARVA POWER & LIGHT COMPANY
------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
-----------
Three Months Ended
March 31
--------------------
1996 1995
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $35,143 $35,408
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization.......................... 31,136 29,337
Allowance for equity funds used during construction.... (225) (184)
Investment tax credit adjustments, net................. (640) (646)
Deferred income taxes, net............................. 8,534 (1,987)
Net change in:
Accounts receivable.................................. (5,926) 1,362
Inventories.......................................... 7,761 11,516
Accounts payable..................................... 3,695 (11,236)
Other current assets & liabilities*.................. 379 32,832
Other, net............................................. (258) (1,824)
------- -------
Net cash provided by operating activities..................... 79,599 94,578
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures, excluding allowance for funds
used during construction................................. (27,445) (22,393)
Allowance for borrowed funds used during construction..... (606) (541)
Investment in subsidiary projects and operations.......... (1,023) (712)
(Increase)/decrease in bond proceeds held in trust funds.. 4,263 (123)
Deposits to nuclear decommissioning trust funds........... (1,060) (644)
Other, net................................................ (2,058) (536)
------- -------
Net cash used by investing activities......................... (27,929) (24,949)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends: Common......................................... (23,325) (22,873)
Preferred...................................... (2,495) (2,302)
Issuance of common stock.................................. 56 6,518
Purchase of common stock.................................. (1,200) (1,223)
Retirement of long-term debt.............................. (308) (273)
Principal portion of capital lease payments............... (1,503) (2,454)
Net change in term loan................................... -- (45,000)
Net change in short-term debt ............................ (10,539) 5,981
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Net cash used by financing activities......................... (39,314) (61,626)
------- -------
Net change in cash and cash equivalents....................... 12,356 8,003
Cash and cash equivalents at beginning of period.............. 28,951 25,029
------- -------
Cash and cash equivalents at end of period.................... $41,307 $33,032
======= =======
*Other than debt classified as current and current deferred income taxes.
See accompanying Notes to Consolidated Financial Statements.
- 5 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. INTERIM FINANCIAL STATEMENTS
----------------------------
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. The statements reflect all adjustments
necessary in the opinion of the Company for a fair presentation of interim
results. They should be read in conjunction with the Company's 1995 Annual
Report to Stockholders and Part II of this Report on Form 10-Q for
additional relevant information.
2. PURCHASE OF CONOWINGO POWER COMPANY
-----------------------------------
As previously disclosed in Note 4 to the Consolidated Financial Statements
of the Company's 1995 Annual Report to Stockholders, on June 19, 1995, the
Company acquired Conowingo Power Company (COPCO), which was merged into the
Company and now is being operated as the Conowingo District. Operating
results of the Conowingo District after June 19, 1995 are included in the
Company's Consolidated Statement of Income.
3. SALEM NUCLEAR GENERATING STATION
--------------------------------
The Company owns 7.41% of Salem Nuclear Generating Station (Salem), which
consists of two pressurized water nuclear reactors (PWR) and is operated by
Public Service Electric & Gas Company (PSE&G). As of March 31, 1996, the
Company's net investment in plant in service for Salem was approximately
$57 million for Unit 1 and $61 million for Unit 2, including common plant
allocated between the two units. Each unit represents approximately 2% of
the Company's total assets and approximately 3% of the Company's installed
electric generating capacity.
Salem Units 1 and 2 were removed from operation by PSE&G on May 16, 1995,
and June 7, 1995, respectively, due to operational problems and maintenance
concerns. On June 9, 1995, PSE&G advised the Nuclear Regulatory Commission
(NRC) that it would keep both units off-line until the maintenance
necessary for safe, reliable operation is completed. NRC approval is
required to restart the units.
The Company has been informed by PSE&G of the following. With respect to
Unit 1, the most recent inspection of the steam generators is not complete,
but partial results from inspections in February 1996 using a new testing
technology indicated degradation in a significant number of tubes. PSE&G
has removed several tubes for laboratory examination to confirm the results
of the inspections. The Salem co-owners have been evaluating several
options which include repair of degraded tubes by sleeving at locations
found to contain crack-like indications, replacement of the steam
generators with existing unused steam generators from a utility that had
previously canceled a new plant, or repair for an interim period and then
replacement of the steam generators with newly constructed steam
generators. These evaluations are expected to be completed in May 1996.
Implementation of one or more of these options may enable Unit 1 to return
to service by mid-1997. Degradation of steam generators in PWRs has become
of increasing concern for the nuclear industry and has resulted in
utilities repairing or replacing steam generators and, in the extreme,
retiring nuclear power reactors.
- 6 -
With respect to the repair and replacement options for Unit 1, PSE&G has
informed the Company of the following. The option to repair the degraded
tubes by sleeving has an estimated cost ranging from $19 million to $38
million, of which the Company's share would range from $1 million to $3
million and be expensed as incurred. Repairing the tubes is expected to
allow Unit 1 to operate for up to three years; however, additional
inspections, repairs, and/or mid-cycle outage costs may be necessary. The
option to replace Unit 1's steam generators with existing unused steam
generators from a utility that had previously canceled a new plant has an
estimated cost ranging from $150 million to $170 million, of which the
Company's share would range from $11 million to $12 million, and would
permit the unit to operate for the remainder of its license term. The
option to repair the degraded tubes followed by replacement with newly
constructed steam generators (at a cost similar to the existing unused
steam generators) has an estimated total cost of $169 million to $208
million, of which the Company's share would range from $12 million to $15
million. The Company expects that the costs to replace the steam
generators would be capitalized.
PSE&G also has informed the Company that preliminary results from
inspections of the Unit 2 steam generators in February 1996 using the new
testing technology confirm that the condition of the Unit 2 steam
generators is within current repair limits. PSE&G also has removed several
tubes from the Unit 2 steam generators for laboratory analysis to confirm
the results of testing. As a result of the extent of the degradation in
the Unit 1 steam generators, PSE&G is focusing its efforts on the return of
Unit 2 to service by the end of August 1996. The conduct of the additional
steam generator inspections and testing on Unit 2 is not expected to affect
the timing of its restart. However, the Company cannot predict when the
NRC will approve the restart of the unit or when the restart actually will
occur.
In 1995, the Company incurred higher than expected operation and
maintenance costs at Salem of approximately $5 million, which were expensed
as incurred. Based on PSE&G's current estimates, the Company estimates
that its share of additional operation and maintenance costs in 1996 will
range from $5 million to $7 million; however, this could change as a
result of PSE&G's further analysis of the steam generator tubes.
The Company incurs replacement power costs while the units are out of
service of approximately $750,000 per month, per unit. Such amounts vary,
however, depending on the cost and availability of other Company-owned
generation and the cost of purchased energy. In 1995, the Company incurred
estimated replacement power costs of approximately $8 million. From the
inception of the Salem unit outages through March 31, 1996, one-half of the
estimated replacement power costs of approximately $14 million has been
expensed and the other one-half has been deferred on the Company's
Consolidated Balance Sheet in expectation of future recovery. During 1996,
the Company plans to file a proposal with the DPSC, the Company's primary
rate jurisdiction, to address the recovery of replacement power costs.
- 7 -
On February 27, 1996, the co-owners of Salem, including the Company, filed
a complaint in the United States District Court for the District of New Jersey
against Westinghouse Electric Corporation (Westinghouse), the designer and
manufacturer of the Salem steam generators. The complaint, which seeks to
recover from Westinghouse the costs associated with and resulting from the
cracks discovered in Salem's steam generators and with replacing such steam
generators, alleges violations of federal and New Jersey Racketeer
Influenced and Corrupt Organizations Acts, fraud, negligent
misrepresentation, and breach of contract. The Salem co-owners contend that
the recently-discovered degradation of the steam generators will prevent
the steam generators from operating for a design life of 40 years. The
lawsuit asserts that the Salem steam generators ultimately will require
replacement and these costs should be borne by Westinghouse and not the
customers and shareholders of the Salem co-owners. Westinghouse filed an
answer and a $2.5 million counterclaim for unpaid work on April 30, 1996.
The Company cannot predict the outcome of this lawsuit.
On March 5, 1996, the Company and PECO Energy Company (PECO) filed a
complaint in the United States District Court for the Eastern District of
Pennsylvania against Public Service Enterprise Group, Inc. (Enterprise) and
PSE&G. The lawsuit alleges that the defendants failed to heed numerous
citations, warnings, notices of violations, and fines by the NRC as well as
repeated warnings from the Institute of Nuclear Power Operations about
performance, safety, and management problems at Salem and to take appropriate
corrective action. The suit contends that as a result of these actions and
omissions, the Salem units were forced to shut down in 1995. The suit asks
for compensatory damages for breach of contract, negligence, and punitive
damages, in amounts to be specified. The Company cannot predict the
outcome of this lawsuit. A similar complaint has been filed against Enterprise
and PSE&G in the Superior Court of New Jersey by the remaining co-owner,
Atlantic City Electric Company.
4. CONTINGENCIES
-------------
Nuclear Insurance
- -----------------
In the event of an incident at any commercial nuclear power plant in the
United States, the Company could be assessed for a portion of any third-
party claims associated with the incident. Under the provisions of the
Price Anderson Act, if third-party claims relating to such an incident
exceed $200 million (the amount of primary insurance), the Company could
be assessed up to $23.7 million for third-party claims. In addition,
Congress could impose a revenue-raising measure on the nuclear power
industry to pay such claims.
The co-owners of the Peach Bottom Atomic Power Station (Peach Bottom) and
Salem maintain property insurance coverage in the aggregate amount of
$2.8 billion for each unit for loss or damage to the units, including
coverage for decontamination expense and premature decommissioning. The
Company is self-insured, to the extent of its ownership interest, for its
share of property losses in excess of insurance coverages. Under the
terms of the various insurance agreements, the Company could be assessed
up to $5.4 million in any policy year for losses incurred at nuclear
plants insured by the insurance companies.
The Company is a member of an industry mutual insurance company, which
provides replacement power cost coverage in the event of a major
accidental outage at a nuclear power plant. The premium for this
coverage is subject to retrospective assessment for adverse loss
experience. The Company's present maximum share of any assessment is
$1.4 million per year.
- 8 -
The property damage and replacement power policies discussed above do not
cover the operational problems and maintenance concerns, including the
steam generator degradation, which caused PSE&G to remove Salem Units 1
and 2 from operation and to keep the units shut down.
Environmental Matters
- ---------------------
As previously disclosed under "Hazardous Substances" on page I-19 of the
Company's 1995 Annual Report on Form 10-K, the disposal of
Company-generated hazardous substances can result in costs to clean up
facilities found to be contaminated due to past disposal practices. The
Company is currently a potentially responsible party at three federal
superfund sites and is alleged to be a third-party contributor at two
other federal superfund sites. The Company also has two former coal
gasification sites in Delaware and one former coal gasification site in
Maryland which are state superfund sites. The Company is currently
participating with the States of Delaware and Maryland in evaluating
these sites to assess the extent of contamination and risk to the
environment. As of March 31, 1996, the Company had accrued a liability
of $2 million representing its estimate of site study and cleanup costs
for all of its federal and state superfund sites.
Other
- -----
The Company is involved in certain other legal and administrative
proceedings before various courts and governmental agencies concerning
rates, fuel contracts, tax filings, and other matters. The Company
expects that the ultimate disposition of these proceedings will not have
a material effect on the Company's financial position or results of
operations.
5. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Three Months Ended
March 31,
-------------------
(Dollars in Thousands) 1996 1995
-------- --------
Cash paid for
Interest, net of amounts
capitalized $12,241 $12,151
Income taxes, net of refunds $5,387 $6,685
- 9 -
6. NONUTILITY SUBSIDIARIES
-----------------------
The following presents condensed financial information of the Company's
nonregulated wholly-owned subsidiaries: Delmarva Capital Investments, Inc.;
Delmarva Energy Company; and Delmarva Industries, Inc. A subsidiary that
leases real estate to the Company's utility business, Delmarva Services
Company, is excluded from these statements since its income is derived from
intercompany transactions which are eliminated in consolidation.
Three Months Ended
March 31,
------------------
(Dollars in Thousands) 1996 1995
-------- --------
Revenues and gains
Landfill and waste hauling $3,213 $3,183
Operating services 4,715 5,480
Real estate 1,816 226
Leveraged leases 149 94
Other revenue 3,414 3,164
------ ------
13,307 12,147
------ ------
Cost and expenses
Operating expenses 10,074 9,126
Interest expense, net 169 74
Income taxes 1,011 1,048
------ ------
11,254 10,248
------ ------
Net income $2,053 $1,899
====== ======
Earnings per share of common
stock attributed to subsidiaries $0.03 $0.03
- 10 -
SELECTED FINANCIAL AND OPERATING DATA
-------------------------------------
(Dollars in Thousands)
3 Months Ended
March 31
--------------------------
1996 1995
---------- ----------
ELECTRIC REVENUES
- -----------------
Residential $109,303 $84,591
Commercial 68,473 58,801
Industrial 38,323 36,064
Resale 19,263 16,098
Other Sales Revenues (1) (5,742) (1,825)
---------- ----------
Sales Revenues 229,620 193,729
Interchange Deliveries 13,795 18,873
Miscellaneous Revenues 3,524 2,807
---------- ----------
Total Electric Revenues $246,939 $215,409
========== ==========
ELECTRIC SALES
(1000 kWh)
- --------------
Residential 1,359,827 1,040,004
Commercial 1,007,861 877,659
Industrial 814,263 801,045
Resale 402,179 320,242
Other sales (2) (100,206) (47,187)
---------- ----------
Total Electric Sales 3,483,924 2,991,763
========== ==========
GAS REVENUES
- ------------
Sales (1) $44,829 $41,590
Gas Transportation Revenues 361 482
Miscellaneous Revenues 501 119
---------- ----------
Total Gas Revenues $45,691 $42,191
========== ==========
GAS SALES AND GAS TRANSPORTED
(1000 mcf)
- -----------------------------
Sales (2) 7,936 7,201
Gas Transported 670 737
---------- ----------
Total 8,606 7,938
========== ==========
March 31, 1996 December 31, 1995
-------------------------- --------------------------
$ % $ %
---------- ---------- ---------- ----------
CAPITALIZATION
- --------------
Variable Rate Demand Bonds (3) $86,500 4.2 $86,500 4.3
Long-Term Debt 853,585 41.8 853,904 42.0
Preferred Stock 168,085 8.2 168,085 8.3
Common Stockholders' Equity 931,844 45.8 923,440 45.4
---------- ---------- ---------- ----------
Total $2,040,014 100.0 $2,031,929 100.0
========== ========== ========== ==========
(1) Includes unbilled revenues.
(2) Includes unbilled sales.
(3) The Company intends to use the bonds as a source of long-term financing
as discussed in Note 12 to the Consolidated Financial Statements of the
1995 Annual Report.
- 11 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
EARNINGS SUMMARY
- ----------------
The earnings per average share of common stock attributed to the core
utility business and nonutility subsidiaries are shown below.
Three Months
Ended
----------------
3/31/96 3/31/95
------- -------
Core Utility $0.51 $0.52
Nonutility Subsidiaries 0.03 0.03
----- -----
$0.54 $0.55
===== =====
For the three months ended March 31, 1996, compared to the same period a
year ago, earnings per share decreased $0.01. The current year period
reflects increased revenues from colder winter weather offset primarily by
higher expenses associated with the extended outage at Salem. The higher
Salem expenses reduced earnings by $0.07 per share and were comprised of
additional operation and maintenance expenses ($0.04 per share) and
replacement power costs ($0.03 per share). Refer to Note 3 to the
Consolidated Financial Statements for additional information concerning the
Salem outage.
Operating results from the Conowingo District, which began in June 1995,
had a minimal impact on earnings, as expected.
STRATEGIC PLANS FOR COMPETITION
- -------------------------------
Wholesale (Resale) Business
- ---------------------------
In March 1996, Old Dominion Electric Cooperative (ODEC), the Company's
largest resale customer, issued a request for proposals that could
eventually replace ODEC's capacity and energy agreements with its current
suppliers, including a partial requirements agreement with the Company.
The Company plans to submit a proposal to ODEC to provide all or part of
the load currently supplied by the Company as well as the additional load
currently supplied by another utility. ODEC is expected to make a decision
in this matter in the fourth quarter of this year.
The Company has extended termination notice provisions with ODEC which
provide the Company with the opportunity to manage the financial impact of
any reduction in ODEC's load. The extended notice provisions require ODEC
to provide the Company with two years' notice for up to a 30% load
reduction and five years' notice for load reductions greater than 30%. To
date, ODEC has not given notice of its intent to terminate any portion of
service provided by the Company. Should any portion of the Company's
service to ODEC be reduced under the notice provisions, the Company's
earnings would not be impacted until late 1998 or 1999.
In 1995, total revenues from ODEC represented 3.8% of the Company's total
sales revenues, and non-fuel (base rate) revenues from ODEC were
approximately $24 million. Should any portion of the Company's service to
ODEC be reduced, the decrease in non-fuel revenues would be partially
offset by transmission wheeling revenues and the avoidance of costs
associated with short-term capacity purchases which are expected to be made
in the future to supply a portion of ODEC's load.
- 12 -
Retail Business
- ---------------
In February 1996, the Company made presentations to the Delaware and
Maryland Public Service Commissions (DPSC and MPSC, respectively) to
propose the formation of a collaborative to address changes in the
regulation of the electric utility industry. The Company's objective is to
work together with the Commissions and other interested parties in order to
develop a blueprint to move toward increased customer choice, i.e. the
ability of all retail customers to gain direct access to market-priced
electricity from the suppliers of their choice. The collaborative process
would address issues such as retail wheeling, stranded investment, rate
redesign, and alternative forms of regulation, such as performance-based
regulation.
A letter filing was made with the MPSC on March 1, 1996. On March 27,
1996, the MPSC concluded that: (1) the Company be encouraged to institute
an informal forum to pursue a detailed study of the feasibility of
implementing retail competition within its service territory; (2) the MPSC
will accept a report by October 30, 1996 on the results of the forum and
related recommendations; and (3) the MPSC's staff will participate in the
process, and the Office of the People's Counsel is encouraged to
participate as well.
On April 9, 1996, the Company filed a Motion with the DPSC for
establishment of a Forum to examine the merits of and the methods for
allowing customers to choose their electricity suppliers. On April 16,
1996, the DPSC issued its Order establishing the Forum. The Order adopts
the Company's proposal to arrange seminars with electric utility industry
and other experts representing a variety of viewpoints on the significant
issues raised by allowing customer choice. Thereafter, Forum participants
will address the various issues, including: public utility corporate
structures; retail wheeling rates, terms, and conditions, including the
issue of reciprocity; transition period public utility and customer
obligations, including prices for current generating capacity and output,
and the issue of stranded investment; performance-based regulation of
delivery services; and specific transition mechanisms to allow customer
choice, including interim rate design improvements. Forum participants
will then submit a report to the DPSC by December 31, 1996. The report
will describe the significant issues raised by allowing customer choice,
detail proposed solutions to those issues, and identify changes to existing
rules and laws which may be necessary to allow customer choice.
Refer to Part II of this Report on Form 10-Q for an update on matters
previously disclosed in the Company's 1995 Annual Report on Form 10-K
regarding the Company's proposed special contract rate tariffs.
Other
- -----
Refer to Part II of this Report on Form 10-Q for a discussion of two
recently issued rulings from the Federal Energy Regulatory Commission
(FERC), which encourage competition in the electric utility industry.
- 13 -
ELECTRIC REVENUES AND SALES
- ---------------------------
Details of the changes in the various components of electric revenues for
the three months ended March 31, 1996 as compared to the same period in
1995 are shown below (dollars in millions):
Non-fuel (Base Rate) Revenues
Retail Sales Volume $25.2
Resale Sales Volume 0.7
Increased Rates 1.4
Fuel Revenues 8.6
Interchange Delivery Revenues (5.1)
Other Operating Revenues 0.7
-----
Total $31.5
=====
Non-fuel revenues increased $25.2 million from retail sales volume due to a
15.4% increase in retail kilowatt-hour (kWh) sales, which resulted
primarily from Conowingo District sales beginning June 19, 1995. Excluding
the Conowingo District, retail sales increased 6.7%, mainly due to the
effects of colder winter weather and a strong economy in the Company's
service territory. Excluding the Conowingo District, billed sales to
residential and commercial customers increased 17.0% and 7.8%,
respectively, while industrial sales decreased 3.0%, mainly due to a large
customer's temporary curtailment in production resulting from an equipment
problem.
Non-fuel revenues increased $0.7 million from resale sales volume due to a
25.6% increase in resale sales, resulting from colder winter weather and
the Company providing its Delaware municipal customers with a portion of
their load that had been supplied by sources other than the Company.
Changes in resale sales have less of an impact on non-fuel revenues than
changes in retail sales, since average resale non-fuel rates are
significantly lower than average retail non-fuel rates.
The $1.4 million increase in non-fuel revenues from increased rates
resulted from a $4.5 million annual increase in Delaware effective May 1,
1995.
Electric fuel costs billed to customers, or fuel revenues, generally do not
affect net income, since the expense recognized as fuel costs is adjusted
to match the fuel revenues. The amount of under- or over-recovered fuel
costs is deferred until it is subsequently recovered from or returned to
utility customers. Fuel revenues increased $8.6 million primarily due to
higher sales.
Interchange delivery revenues are reflected in the calculation of rates
charged to customers under fuel adjustment clauses and, thus, generally do
not affect net income. Interchange delivery revenues benefit customers by
reducing the effective cost of fuel billed to customers. Interchange
delivery revenues decreased $5.1 million primarily due to the reduced
availability of certain of the Company's generating units.
GAS REVENUES, SALES, AND TRANSPORTATION
- ---------------------------------------
Total gas revenues increased $3.5 million because of a $2.4 million
increase in non-fuel revenues and a $1.1 million increase in fuel revenues.
Non-fuel and fuel revenues increased primarily due to a 15.5% increase in
firm gas sales as a result of colder winter weather.
- 14 -
ELECTRIC FUEL AND PURCHASED POWER EXPENSES
- ------------------------------------------
Electric fuel and purchased power expenses increased $7.8 million for the
following reasons: (1) Expenses increased $24.1 million due to a higher
average cost per kWh of output, which primarily was due to higher gas and
oil commodity prices and the increased use of higher-priced purchased power
as a result of higher demand coupled with the reduced availability of
certain of the Company's generating units; (2) Expenses increased $3.2
million due to increased kWh output, which resulted from stronger sales
demand; and (3) Expenses decreased $19.5 million due to variances in fuel
costs deferred and subsequently amortized under the Company's fuel
adjustment clauses.
The kWh output required to serve load within the Company's service
territory is substantially equivalent to total output less interchange
deliveries. For the three months ended March 31, 1996, the Company's
output for load within its service territory was provided by 33% coal
generation, 29% net purchased power, 28% oil and gas generation, and 10%
nuclear generation.
OPERATION, MAINTENANCE, AND DEPRECIATION EXPENSES
- -------------------------------------------------
Operation and maintenance expense increased $19.5 million as a result of
the following factors: $8.6 million of capacity purchase charges under a
long-term contact with PECO, which was entered into concurrently with the
Company's purchase of COPCO; $4.0 million related to the Salem outage; $1.5
million related to the Conowingo District; and $5.4 million of other costs,
which consisted primarily of higher maintenance costs at Company-owned
power plants associated with the timing of plant maintenance outages
between periods. Total maintenance costs at Company-owned plants for all
of 1996 are expected to be in line with 1995 amounts.
Depreciation expense increased $2.8 million, primarily due to higher
utility plant balances including that of the Conowingo District.
UTILITY FINANCING COSTS--INTEREST EXPENSE
- -----------------------------------------
Interest expense increased $2.4 million, primarily due to the issuance of
long-term debt to acquire COPCO.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided by operating activities decreased $15.0 million,
primarily due to the under-recovery of fuel costs in the current three-
month period and the over-recovery of fuel costs in the prior three-month
period.
For the three months ended March 31, 1996, utility construction
expenditures were $27 million compared to $22 million for the same period
last year. Internally generated funds (net cash provided by operating
activities less common and preferred dividends) significantly exceeded the
cash required for construction in both periods.
- 15 -
RATIO OF EARNINGS TO FIXED CHARGES
- ----------------------------------
The Company's ratios of earnings to fixed charges under the Securities and
Exchange Commission (SEC) Method are shown below:
12 Months
Ended
March 31, Year Ended December 31,
1996 -----------------------------------------------
--------- 1995 1994 1993 1992 1991
------- -------- -------- -------- --------
Ratio of Earnings to Fixed Charges
(SEC Method)........................ 3.46 3.54 3.49 3.47 3.03 2.58
Ratio of Earnings to Fixed Charges
(SEC Method) as Adjusted............ 3.74 2.78
Adjusted ratios reflect the following pre-tax amounts; for 1994, the
exclusion of a $17.5 million early retirement offer charge and, for 1992,
the exclusion of an $18.5 million gain from the Company's share of a
settlement reached in the lawsuit against PECO in connection with the
shutdown of Peach Bottom.
Under the SEC Method, earnings, including Allowance for Funds Used During
Construction (AFUDC), have been computed by adding income taxes and fixed
charges to net income. Fixed charges include gross interest expense and
the estimated interest component of rentals. Net income and income taxes
related to the cumulative effect of a change in accounting for unbilled
revenues recorded in 1991 are excluded from the computation of these
ratios.
- 16 -
PART II. OTHER INFORMATION
--------------------------
Item 5. Other Information
- -------------------------
A) Salem Nuclear Generating Station
--------------------------------
For an update on matters concerning Salem, refer to Note 3 to the
Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations.
B) Special Contract Rate Tariffs
-----------------------------
The following is an update to matters disclosed in the Company's 1995
Annual Report on Form 10-K under "Regulatory and Rate Matters--Other
Regulatory Matters." On April 16, 1996, the DPSC approved the
Company's Economic Development Rate and Negotiated Contract Rate
Tariffs.
C) Recent FERC Rulings
-------------------
The following is an update to matters disclosed in the Company's 1995
Annual Report on Form 10-K under "Strategic Plans for Competition--
Electric Resale Business." On April 24, 1996, the FERC issued two
closely related rules. The first rule, Order No. 888, requires
electric utilities to provide open access to their transmission
systems under non-discriminatory tariffs available to all wholesale
sellers and buyers of electricity. Utilities are required to offer
transmission services comparable to the services they provide to
themselves and to take transmission services under the same tariffs
applied to their transmission customers. The rule also provides for
the recovery of stranded costs associated with wholesale requirements
contracts under certain circumstances and states that stranded costs
resulting from retail markets are subject to the jurisdiction of state
regulatory commissions.
The second rule, Order No. 889, is designed to ensure that
transmission owners and their affiliates do not have an unfair
competitive advantage in using transmission to sell power. The rule
requires utilities to obtain information about their transmission
system for their own wholesale power transactions, such as available
capacity, in the same way as their competitors do--via an electronic
system (Open Access Same-time Information System (OASIS)) on the
Internet. The rule also requires utilities to functionally separate
their wholesale power marketing and transmission functions.
D) Power Outage
------------
At approximately 10:00 a.m. on May 14, 1996, the Company experienced
an equipment problem at a major interconnection substation serving
the Delmarva peninsula. As a result, electric service was lost to
approximately 300,000 customers, including customers served by resale
customers of the Company, in the southern part of Delaware and the
eastern shore of Maryland and Virginia. Electric service was
restored throughout the day with restoration of power completed by
approximately 5:30 p.m. on May 14, 1996.
- 17 -
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
A) Exhibits
--------
Exhibit 12, Computation of Ratio of Earnings to Fixed Charges.
Exhibit 27, Financial Data Schedule.
B) Reports on Form 8-K
-------------------
A Report on Form 8-K dated February 22, 1996, updating matters related to
Salem Units 1 and 2 previously reported, was filed with the Commission.
- 18 -
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Delmarva Power & Light Company
------------------------------
(Registrant)
Date: May 15, 1996 /s/ B. S. Graham
---------------- ------------------------------------
B. S. Graham, Senior Vice President,
Treasurer, and Chief Financial Officer
- 19 -
EXHIBIT INDEX
Exhibit Page
Number Number
------ ------
Computation of ratio of earnings to fixed charges 12 21
Financial Data Schedule 27 22
- 20-